Social Security benefits are taxable?

Dear Tax Talk,
I am 66 years old. My income is approximately $30,000 a year. I just started collecting Social Security at 66. Do I have to pay taxes on this extra money and why? How do I prevent this from happening if possible?
-- Fred

More On Social Security Benefits:

Dear Fred,
According to the September 2013 statistics released by the Social Security Administration, you are now in the company of 39,313,000 individuals aged 65 or older receiving Social Security benefits. As a general rule, Social Security benefits are not taxable if they are your only source of income during a year. But if you have investment income or earned income, then up to 85 percent of your Social Security benefits may be taxable, depending on your filing status and the amount of the income.

The first step is to determine whether your benefits are taxable and if the answer is yes, then the next step is to calculate how much of your benefits are taxable.

To calculate whether your Social Security benefits are taxable, you need to add half of your Social Security income that is reported in Box 5 of your Form SSA-1099 to your income, which includes taxable pensions, wages, interest, dividends, other taxable income and tax-exempt interest income. If you are married and file a joint return, you need to include the income and benefits, if any, received by your spouse. You then need to compare this number to your "base amount."

Your base amount is:

$25,000 if your filing status is single, head of household or qualifying widow(er);

$25,000 if you are married filing separately and lived apart from your spouse for all of 2013;

$32,000 if you are married filing jointly, or

$0 if you are married filing separately and lived with your spouse at any time during 2013.

If the amount you calculated above is equal to or less than the base amount for your filing status, none of your Social Security benefits are taxable this year. If the amount calculated is more than your base amount, then some of your benefits may be taxable.

The next step is to use the worksheet that is included in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to calculate the amount of the taxable Social Security benefits. You will report the Social Security benefits on Line 20 of your Form 1040.

In order to prevent the Social Security benefits from being taxable, you will have to decrease the amount of income you are receiving so that you are below your base amount.

Ask the adviser

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

Judy O'Connor has been a practicing CPA for more than 25 years in the South Florida community and assists her diverse client base in all aspects of tax compliance at a local, state and federal level. Her clients consist of individuals, corporations, limited liability companies, partnerships and estates.

Bankrate wants to hear from you and encourages thoughtful and constructive comments. We ask that you stay focused on the story topic, respect other people's opinions, and avoid profanity, offensive statements, illegal contents and advertisement posts. Comments are not reviewed before they are posted. Bankrate reserves the right (but is not obligated) to edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused. We do not permit the inclusion of hyperlinks in comments and may remove any comment that includes a hyperlink.

Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on certain links posted on this website.